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Once and Future Gift Taxation of Transfers to Section 501(c)(4) Organizations: Current Law, Constitutional Issues, and Policy Considerations

The applicability of the gift tax for transfers to section 501(c)(4) social welfare organizations, entities that are permitted to intervene in political campaigns to a significant extent while keeping their donors anonymous, has long been a matter of uncertainty. Applicability of the gift tax to contributions to section 501(c)(4) organizations is of great importance to these organizations because if the gift tax applies and were to be enforced, the amounts such organizations receive are likely to be significantly reduced. In many cases, donors would be expected to take such cost into account and reduce the amount of their contributions.

This issue has gone without resolution because for decades the IRS has not enforced the gift tax in such situations. Recently, however, a furor arose about application of the gift tax to donors to section 501(c)(4) that engage in campaign intervention, only to die down soon after it appeared. The IRS acknowledged in May that it had audits underway for five such donors, only to suspend the audits after receiving letters from Republican members of the Senate Finance Committee and House Ways and Means Committee objecting to the audits. In July, Steven T. Miller, Deputy Commissioner for Services and Enforcement, wrote a memo stating that his office would be coordinating with the Office of Chief Counsel as to whether there is a need for further guidance in the area, closing any outstanding efforts and stating that no examination resources would be expended on the issue until further notice.

The purpose of this piece is to scrutinize the issues raised in connection with applying the gift tax to contributions to section 501(c)(4) organizations. It examines the status of such taxation under current law, the constitutionality of such taxation, and policy considerations. It concludes that, despite precedents that might be interpreted to the contrary, the better view is that such gifts are taxable under current law and that, despite Supreme Court campaign finance reform precedents, such taxation is constitutional under Supreme Court tax law precedents. Nonetheless, important constitutional values are at stake, and Congress should enact a provision explicitly exempting such contributions from the gift tax, as well as a provision taxing donations of appreciated property and a provision requiring donor disclosure. Failure by the IRS to enforce the law is not a satisfactory solution.

Part I explains the structure, history and purpose of the gift tax. Part II describes section 501(c)(4) organizations. Part III presents administrative and judicial precedents. Part IV sets forth constitutional arguments both against and in favor of applying the gift tax to section 501(c)(4) organizations. Part V adds the policy calculus that calls for Congress to enact a provision adding an exemption from the gift tax for section 501(c)(4) organizations. Part VI concludes.